Crackdown on R&D tax relief driven by BE case

The government has launched a crackdown on research and development tax credit claims following the recent BE Studios case, which suggested companies were claiming hundreds of thousands of pounds in R&D credits to which they were not entitled.

HM Revenue & Customs has begun asking applicants detailed questions about the R&D they are undertaking, and referring them to the details of BE’s case as guidance.

In July a High Court judge ruled that software company BE Studios had claimed £150,000 in R&D tax credits in error, a payment that would not have been made had HMRC undertaken sufficient enquiries into BE’s case, the judge said.

Accountancy Age has seen a copy of a letter sent by a tax inspector querying an R&D claim and advising the claimant to look at the BE case for guidance.

‘A fundamental point in that case was whether the scientific work carried out by the company sought to achieve a scientific or technological advance, and form the whole or part of a project to resolve scientific or technological uncertainty. It was found that there had not been qualifying expenditure within the DTI guidelines,’ the letter reads.

The case, it continues, ‘sets out the interaction’ between the various guidelines relating to the credit.

Tax advisers said that the letter was unlikely to be the only one. Mike Warburton of Grant Thornton said he expected that HMRC would have circulated guidance on the case to tax inspectors.

David Cobb, an R&D tax credit expert at Deloitte, said he believed the Revenue would have informed inspectors about the case, adding that it was clearly using the case as ‘a warning shot.’

‘This case makes it clear that you need to do a certain amount of due diligence on the credits,’ he said.

Warburton said the case had raised serious issues about the operation of the tax credit, saying he thought the Revenue had simply been ‘waving these cases through.’

The letter queries an application for the credit. It is unclear as to whether or not HMRC has also begun to audit claims that it had already paid out on.

The system for assessing eligibility for the credits has been criticised for not employing scientifically trained inspectors to assess claims. The Treasury recently launched a review of the credits, one of chancellor Gordon Brown’s flagship tax schemes. The BE case is likely to strengthen calls for the system to be tightened up.